Red Hat Closes Out Fiscal 2006 with 'Smashmouth' Growth

Published: April 4, 2006

by Timothy Prickett Morgan

Last week, commercial Linux distributor Red Hat reported its financial results for fiscal 2006 ended February 28. Having added 50,000 new customers in fiscal 2006 and with a very high renewal rate, Red Hat is obviously pretty happy.

For the year, Red Hat booked $230.4 million in subscription sales, up 52 percent, with training and services sales of $47.9 million, up 6 percent. Total sales for the year came to $278.3 million, up 42 percent. Fully diluted net income came to $85.5 million, up 66 percent, which shows Red Hat is keeping a tight rein on costs as it grows. Net income per share was 41 cents for the year, compared to 24 cents in fiscal 2005.

For the final quarter of the year, which includes the relatively sluggish December through January period, Red Hat reported sales of $78.7 million, up 37 percent from the prior year, and brought $28.7 million of that to the bottom line. That is an astounding 37 percent of revenue as net, not gross, profit, and it shows that the company is now large enough and has momentum enough to be a serious contender in the software business--as many were betting when Red Hat went public in the summer of 1999. Having said that, a company that is perhaps on track to break $1 billion in annual sales in about two years is perhaps today overvalued at a market capitalization of just under $5 billion.

"Last year, I referred to our approach as 'smashmouth software,' day-to-day, hour-to-hour execution," said Matthew Szulik, Red Hat's chairman and CEO, in a conference call with Wall Street analysts. "I would characterize our fiscal year 2006 as solid execution. The senior management team is seasoned, and the executives we added last year are now fully up the learning curve." Szulik said that Red Hat had invested $17 million in upgrading its own IT systems last year and has added 278 employees; he also said that the company has offices in 17 countries now. Perhaps most astoundingly, for the fourth quarter, the top 25 accounts that were up for renewal for Linux subscription services all renewed, and for all of fiscal 2006, 99 out of the 100 top accounts within the four quarters of each year all renewed. What I want to know is, who didn't, and why not?

Red Hat finished the fiscal year with $1.1 billion in cash and equivalents in the bank and $223.5 million in deferred subscription revenue, making it by far the richest and most financially secure Linux and open source company on the planet.